Discounting Dilemma: Indian retailers move away from deep discounts to focus on profitability

India’s retail secstor is witnessing a significant shift as major players like Aditya Birla Fashion and Retail (ABFRL), Arvind, and V-Mart move away from deep discounting to prioritize profitability. This comes amidst a slowdown in retail sales growth, which has fallen year-on-year for every month in FY24 (as per Retailers Association of India or RAI) and continues at a sluggish 4-7 per cent pace in the current year. In fact, despite heavy discounts for the past year and a half, consumer spending hasn't shown significant improvement. This suggests a potential disconnect between discount strategies and actual consumer purchasing habits.

For the past year and a half, retailers heavily relied on discounts to counter sluggish demand. However, this strategy proved ineffective in boosting sales. V-Mart, a department store chain focused on smaller towns, acknowledges this, stating a shift towards ‘internal capability’ for sustainable growth instead of relying on steroids like heavy discounts.

Fashion/apparel sector in focus

The fashion and apparel industry is a prime example of this shift. Companies like Aditya Birla Fashion and Retail (ABFRL) and Madura Fashion (with brands like Louis Philippe and Van Heusen) are actively reducing discounts. As Shailesh Chaturvedi, Managing Director, Arvind Fashions explains, they deliver at the prices that they want and not heavy discounting, etc. So there's a sort of healthier and long-term business.

Madura Fashion too successfully cut discounts by 500 basis points in the latter half of FY24, focusing on controlled inventory and prioritizing profitability. Vishak Kumar, CEO, Madura Fashion says, they realised they were well placed with their inventory and didn't see much elasticity in discounting.

One major reason why discounts are not working right is consumers, especially post-pandemic, seem to be seeking more than just low prices. They are increasingly valuing factors like brand experience, product quality, and ethical sourcing. Retailers are adapting by emphasizing these aspects to build customer loyalty and encourage full-priced purchases.

The impact is felt across segments. While luxury brands might have more buffer for manoeuvring prices, value and mid-range segments traditionally rely heavily on discounts. Retailers are exploring ways to cater to these segments without relying solely on price cuts. Meanwhile, constant discounting can significantly impact a company's financial health. By reducing reliance on discounts, retailers aim to improve margins and achieve sustainable growth. This shift can lead to healthier businesses and potentially better product offerings in the long run.

While discounts might not disappear entirely, a more calculated approach is likely to emerge. Retailers might utilize strategic promotions and loyalty programs to incentivize purchases without sacrificing profitability.

Regulations and the evolving landscape

The government too is considering regulations to curb predatory pricing practices by e-commerce giants, potentially impacting the overall discounting scenario in the retail sector.

The Indian retail landscape is witnessing a potential paradigm shift. As retailers prioritize profitability, deep discounts might take a backseat. This shift, coupled with changing consumer behavior and a focus on brand value, could lead to a more sustainable and competitive retail environment in the long run.